Should You Use Trusts for Your Rental Property?

Trusts for Rental Property

Are trusts a solution to making gifts of rental property?

If you own rental property one thing you might be considering is how to pass that value to your family. One option is to make a gift of the rental property to your children. The most common reason for doing so is to reduce inheritance tax. 

Taxes and other things to consider before making gifts of rental property

Giving away rental property requires careful management. Inheritance Tax isn’t the only factor. There are some other issues you might need to think about before you give away your rental property such as:

  • Capital Gains Tax on the disposal
  • losing the rental income
  • management of the property in the future

Give away an asset and not only do you lose the income and any capital growth, you also surrender all control over it. Loss of income may be a stumbling block but there are ways to deal with that issue. Losing control of the asset could be a significant problem. If the recipients of the gift experience personal difficulties such as bankruptcy or divorce the propery may be at risk.

Those sorts of issues may have to be weighed against another concern – how to reduce inheritance tax due on death.

An outright gift means that as far as Inheritance Tax is concerned, you will have to wait 7 years after making a gift before the value of the property is no longer included in an IHT assessment of your estate. This type of gift is known as a ‘Potentially Exempt Transfer’ or PET. There is therefore a degree of uncertainty connected with making a gift that is a PET.

There are other options available if you want to pass your rental property on to your children. You can remove the value of your rental property from your estate and avoid the PET rule and retain some control. It’s easy to set up and may be read back to an earlier date if you need that.

Why Could Using Trusts Be A Solution?

IHT isn’t the only issue. A CGT charge could make the gift unaffordable. Did you know you can reduce or even eliminate CGT on your rental property by using certain types of trust arrangements?

One option is to declare a trust of the rental property. This would be a lifetime chargeable transfer for IHT but if the value of the property does not exceed the IHT nil rate band (NRB) there would be no charge to IHT.

There are potential ways to handle a CGT issue resulting from the disposal. One possibility may be to roll over any gain into the trust. This postpones the payment rather than eliminating it. Hold over relief for CGT is available where a transfer is a chargeable lifetime transfer for IHT purposes. If the transfer is to trustees the gain may be held over provided the trust is not settlor-interested. This means the settlor, the settlor’s spouse, civil partner or minor child/step-child must not be able to benefit from the trust.

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